May is losing her chance to make the Conservatives the party of savers and potential homeowners
In my last article of a fortnight ago, I argued our economy currently has the following elements.
- Low interest rates.
- High levels of private sector debt.
- High and rising public sector debt.
- High asset prices, corporate debt, (and low corporate productivity).
We urgently need to move away from this model. Theresa May’s One Nation aims do not fit with it. Politically, this model is bust: most voters want higher rates for savers, and home ownership is falling. People are understandably angry that for over a decade the government would talk about rewarding people who do the right thing, yet serious monetary policy has consistently made it harder to save, have a decent pension, or work toward owning your home.
Our current model helps sluggish government and corporates, and those who own assets at the expense of savers and those who want to own their home. Those who benefit are the rich and inefficient, those who lose out are the thrifty, and those wanting to get on the property ladder. (I should add I have nothing against asset owners and have a home – but I object to a policy of government redistribution from earners and savers toward them.) The undermining of ordinary people’s hopes to own and save to benefit those who have large asset portfolios is driving populist anger across the West.
Our economy remains fundamentally unbalanced
Between 1997 and 2015, the money supply (M4) exploded, linked to a giant asset and credit bubble, rising by over 300 per cent. Consumer inflation, by contrast rose by just 60 per cent. Such divergence is unhealthy (repeating the 1980s Lawson bubble on a much larger scale). Our economy is focused on debt-fuelled consumption and asset prices. This imbalance leads to our sluggish economic growth. Essentially, we consume without producing enough, and we have bought into the myth that debt is cost-free, pushed by an alliance of parts of the City and Keynesian left-wing academics.
Since the crash, OECD figures show that net private debt has fallen from 181 per cent to 158 per cent of GDP. This takes us back to 2005 – hardly sustainable. Moreover, this 23 per cent drop has been more than reversed by rising public sector debt, which has risen from 53 per cent to 87 per cent as a share of GDP. Corporate debt has got worse, with the debt to surplus ratio for companies rising from 6.1 to 7.1 since the crunch.
Rebalance with higher inflation from ‘helicopter money’ and higher rates
Left-wing economists and bankers argue that more government debt and money thrown at the banks will rescue the economy. It hasn’t worked in 25 years in Japan. And now, eight years on from the start of the last recession, a deficit of four per cent and interest rates of 0.5 per cent are apparently not enough to ‘stimulate’ the economy. In truth, instead of more cheap credit we need:
- Lower real term asset prices.
- Higher (albeit done slowly) real term interest rates.
- Lower real term debt levels across private, corporate and government sectors.
A purist might argue that we simply must raise interest rates to rebalance the economy, even if that means crashing asset prices, cutting government spending sharply and bringing down zombie corporates. But the chances of a recession, the government falling and the cure not having time to work by 2020 are too high. Instead, we need both consumer price inflation and higher interest rates. This would simultaneously reduce the real value of debt in a way that is manageable for most people, help savers, and make it less attractive to create and take on new debt.
It is bizarre that to achieve consumer price inflation, we have decided to print money to give banks to allow government and corporates to expand debt. It can be seen why inefficient government and corporates and the City like this. It also seems reasonably obvious that it will inflate asset prices and boost debt, and not strengthen the consumer economy or raise prices there. The only effect on inflation is through a weaker pound, and this inflation (unlike consumer/producer price inflation) will not lead to wage inflation, so savers and workers again lose out to benefit asset prices.
Rather than printing money to buy corporate debt and government debt from banks, Government should both raise rates and use the Milton Friedman concept of ‘helicopter money’ to stimulate consumer inflation. Credit a small amount each month to every individual’s preferred current account, and an amount per child up to a maximum of three children. Inflation of 5 per cent requires a £95 billion (given nominal GDP of £.19 trillion) injection, working very roughly out at around £1,500 per head with a population of around 65 million (since pay-outs would be capped for large families). Simply credit £125 a month per head to each account. Consumer prices and wages would then rise, as much of this spending would take place in the consumer sector. This would reduce real debt burdens over time, and it starts to move away from, not reinforce, our current economic model.
Simultaneously, raise interest rates – they should be slightly higher than inflation, and a path set out over a ten year period for them to rise until they are closer to the long term average of four per cent or so ahead of inflation. This would mean while nominal wages and prices rose, cutting existing debt burdens, people would be discouraged from taking on new debt, because high rates mean that new debt in the first few years would be painful (as inflation only slowly erodes the value of such debt), and rates are also going to rise over time.
A One Nation party must rebalance while protecting savers and mortgage holders
The proposal above would benefit savers, who would gain twice over (once from higher rates and once from money deposited into their accounts). It would help cushion borrowers as debt would fall over time and they would receive money directly.
We need to rebalance the economy, but just raising rates sharply and contracting the money supply is politically unrealistic. Instead through raising rates a little and directly injecting money (for a temporary period) into consumer pockets we can find a better way through.
Sadly, I expect that due to the Bank of England’s action, we will see lower productivity growth, higher inflation (without corresponding wage rises so lower real wages), slightly higher asset prices, and lower incomes for savers. I would place your bets against that May 2017 election now.